World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Saturday, October 31, 2009

We discussed the technicals in the prior post, now it’s time to examine the fundamentals. A significant week, our government declared an end to the “recession” (depression that is not anywhere near over) based upon a trumped up GDP report and stocks rolled over, once again proving that rallies often roll over on “good news.”

But I’m not the only one who believes this depression is not over:

Oct. 31 (Bloomberg) -- Nobel Prize-winning economist Joseph E. Stiglitz said the U.S. recession is “nowhere near” an end and the economy’s third-quarter growth rate of 3.5 percent, the first expansion in more than a year, won’t carry into 2010.

While this week’s figures on gross domestic product are “very good,” the numbers would be “miserable” without stimulus measures enacted by the Obama administration, Stiglitz said today at a forum in Shanghai.

No, he can’t use the word depression, that would make him too far outside of the mainstream.

And what does Goldman, the manipulators, think of the latest GDP report?

"How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far? Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter."

Well, funny that they mention that, let’s take a look at the first updated St. Louis Fed chart from this week that caught my attention…

GDP was much touted, but it was, in fact, simply a one quarter .875% rise but year over year GDP is still very negative (even the way the BEA reports it) and, as you can see, created a barely perceptible rise in the chart:

Doesn’t that little hook look just like this one in Corporate Dividends? What a CRASH, one of historic proportions:

Light weight vehicle sales jumped on Cash for Clunkers and then instantly disappeared. The entire economy is on a similar sugar high track:

Is it any wonder, with debt levels sky high, banks raising interest rates and minimum payments on consumers, tighter credit, and higher credit standards? How about the fact that incomes are falling at the same time?

The Employment cost index is at a chart low and descending steeply:

The Employment cost index for Benefits is similarly in a steep downward trend:

Personal consumption is following incomes:

Final Sales to Domestic Purchasers has a greenshoot hook on the bottom of it, just like GDP itself.

Some economists believe that building inventories back up will save the economy… they will be wrong again, but you can see the greenshoot right here that leads them to make comments like that:

Remember our discussion about the GDP’s “deflator?” Well, here’s a chart of the deflator! Note that it peaked with interest rates in about 1980 and is now at the lowest point since the early 1960’s:

And while the government is cranking “liquidity” into the system like crazy, M1, M2, and MZM are coming down in year over year percentage change basis:

And the really damaging part of flooding money into the system is its effect on the money multiplier. Note that this multiplier is now making new lows:

As for the money flowing into the markets, retail money funds are down sharply in dollar terms:

Institutional money funds are also declining:

Expressed in yoy percentage terms, the amount of money entering retail money funds is down more than a whopping 20%!

As I thumb through the charts, I do see little turns or hooks at the end of historic collapses. Those absolutely are based on stimulus, and just like light vehicle sales will disappear as soon as the sugar is removed.

Boy, how ‘bout all those “expert” economist and banker calls so far? Conquistadors they’re not…

The Goldman orchestrated bear massacre of Thursday quickly turned into a bull slaughter on Friday. The S&P 500 now resides 5.9% lower than its 1101 wave B peak, the DOW resides 4% lower, the Transports a divergent 11.1% lower, the NDX has fallen 6.3%, the RUT 10.0%, and the XLF is off 10.8% from it’s recent highs, still a whopping 60% from its ’07 peak.

Fundamentally the stimulus has gone to banks and not into the hands of the consumer who are still rife with debt. The banks and your government are hiding bad debts and derivatives that render our financial system insolvent many times over. Wave A down failed to cleanse the system of the debts or derivatives, it has failed to reign in the criminals, the fraud, the deceit, the printing press, or the government. Wave C will take care of all that.

In Elliott Wave terms, the descent from the September ’07 highs to the 666 bottom was wave A down. The rally from that point this March to the recent highs was wave B which is very likely now complete (the count in some of the indices still allows for higher). Next comes the very destructive wave C down, a wave that will carry with it the seeds of CHANGE that has failed to happen so far. History shows that wave C’s are long and grinding affairs full of volatility and psychological oscillations between hope and despair.

As is the tradition when there is a collapse of credit, wave B retraced nearly 50% of the losses incurred during wave A – 48% in the S&P 500 to be precise.

Friday’s action pretty much drove a stake into the notion that we are going to be setting new highs this year… it’s still technically possible, but not likely. On the very short time frames we are now oversold but the long term divergences are still in place, the decline being confirmed with increases in volume.

The rising wedges across the indices have all broken cleanly and convincingly to the downside, the only exception being the Dow Industrials when viewed on a non-log chart – on a logarithmic chart, it too has now broken the uptrend. These wedges are a very high probability pattern, the target of which is the base of the wedge or lower. That means that we are very likely to revisit the lows shortly. The patterns were not overthrown before breaking, the final leg up failed to reach the upper boundary – a bearish development for sure, especially when confirmed with volume as these have been. In fact, the divergence in volume on Wave B’s rise was HISTORIC, much larger than prior to topping in ’07, and much larger than prior to the crash of 1987.

Let’s look at the charts…

The DOW Industrials are the strongest index so far of this decline. On the log chart they have broken the rising wedge and now sit just under the 50 day moving average. Volume is coming up on the decline and the daily fast stochastic has now reached oversold. The lower Bollinger band is rising steeply to meet prices, that will provide resistance to the decline.

The Industrials have yet to make a new low that’s lower than the previous low, that is a divergence from the Transports that have, and it sets up the possibility of a bullish non-confirmation of a Dow Theory sell signal.

That said, the declines of this bear market have started just like this one with the Transports, then the RUT, and then the NDX leading the decline and eventually pulling the defensive large caps with them. That’s part of the psychological process and yet another myth propagated by Wall Street that big caps will protect you – they won’t. Here’s the simple truth… Stocks do NOT return the historically touted 8% annual rate of return, they never have! Stock INDICES, on the other hand, did in modern history up until about the year 2000. That’s because the indices replace failed firms with younger ones in a process known as substitution bias.

The Dow Industrials are a great example of substitution bias with GE the only survivor of the original companies, and even it is technically dead. No, STOCKS have a life cycle, just like you and me. If you seek growth, get them while they are young (Microsoft being a terrific example). They then mature and their stock plateaus – again, Microsoft is a great example. Once they get too big and too fat they fail – again, GE is a good example, as are all the other Dow stocks that preceded it into the dustbin of history (GM is another good example). A healthy economy and market let the dead die… the undead, the zombies (like GM and all the big banks), are nothing but a barrier to progress. Wave C will place a much needed stake in their undead, blood sucking, vampire like hearts.

The Transports are bearishly diverging against the rest of the market - they have already given back the past 3 months of gains! The are leading… they tell us that the engine of the economy is slowing in the supply chain, again, a slow down of historic proportions. I don’t use the word historic lightly! You are a witness to a very rare economic event, one that in Elliott Wave terms is on the next HIGHER level of order than the Great Depression. No one alive has seen or experienced this level of correction if the Elliott Wave experts I follow are correct.

In the 9 month daily chart of the Transports below, you can see a very clearly broken rising wedge that ended in a double top formation. They have now retraced 23.6% of the entire wave B rise, a possible location for a bounce and well beneath the 50dma. Note that the lower Bollinger band has turned down and away and that a lower low was just made:

The SPX came down and touched the rising bottom Bollinger and stopped just above it, well beneath the rising wedge and 50dma, but not yet at a new lower low. There was also an expanding top in play, the lower boundary of which is now broken as well. Note the horizontal purple line I drew in just below the 50% fib... that's a somewhat likely area of support for the first wave down, right on the 869 pivot, the bottom of wave b of B:

Here’s a weekly version of the SPX bear market showing the bear market downtrend line, the 48% retrace, and the now broken wedge on this week’s bearish candle. Both the weekly and the October monthly bearish candles are on higher volume:

Here’s a 3 month close up of the weekly candle. Note the fresh sell on the weekly stochastic:

Below is a 3 month daily chart of the XLF. It has failed to reach even a 38.2% retrace of the bear market, again a bearish divergence. This decline started when the XLF made a bearish island reversal. Yesterday’s down stroke ended EXACTLY on 13.97, the same location of the last low. That opens up the possibility of a double bottom here, something that I consider unlikely but is there. The XLF also closed below the bottom Bollinger, a place where bounces often start. Volume has yet to really come up here, I am always weary of the moves in the financial space as the games being played by the crooks is absolutely out of control and unchecked. Be careful or you will be robbed – even worse than we all are already:

Want confirmation that wave C down has started? Okay, let’s look at the VIX. Remember that I’ve been saying I doubt if that prior double top holds? It didn’t. The VIX rocketed 24% in one day on Friday to close above 30 for the first time since July. It closed above BOTH the daily and the weekly upper Bollinger band. This is somewhat dangerous as closing back below that Bollinger would technically be a market buy signal… we’ll cross that bridge if and when it happens.

Note on the VIX’s P&F chart that it sees the triple top breakout and reversed its previously bearish target of 12 to a now bullish target (bearish for equities) of 52. There’s money to be made here in options if that target is reached:

I think the relationship of oil to gold here is interesting. Below is a chart of oil futures (/CL) on the left and gold futures (/YG) on the right. Note that oil over the past couple of days made a lower low, but gold has not. In fact, over the past 7 sessions, oil has lost 6.2% and gold only 1.9%. On Friday oil fell 3.5% and gold lost .5%. I think this is illustrating well what’s happening in the economy.

Support for Gold resides in the $1,027 area, resistance at $1,050, and then $1,070. If I were trading gold short term, I would not hold it on a break below $1,027 as the rising trendline will be broken just below that level, then there’s a longer term trendline that currently resides at $1,000 even. The inverse H&S pattern is still targeting $1,325, but it can take some time to get there and if equities really crater, there is risk there.

Demand for oil and oil products is WAAAY down, inventories up. If overall monetary inflation were occurring then the year over year price of both would be zooming. Sure, oil has risen tremendously off it’s lows, but real economic growth is NOT occurring. The only thing that’s growing is the government’s debts, but that growth, as destructive as it is, is not nearly as large as the deleveraging that’s occurring in overall credit especially with the leverage of derivatives considered. It’s difficult to see, so again, I remind doubters that JPM’s derivative portfolio, despite acquisitions, has fallen from $92 horrific trillion to less than "only" $82 trillion. Of course this is a lot like having enough nuclear weapons in your arsenal to destroy the world 100 times over (insane), well, that’s JPMorgan in a nutshell. Gold, I believe, is responding to a lack of confidence due to governmental debt, not due to monetary inflation. Sure they are printing and attempting to create monetary inflation, but they are not succeeding in doing anything of the sort, but they are succeeding in destroying confidence in our system.

Like the VIX, the Put/Call ratio broke out to new recent highs, closing Friday at 1.21. Extreme readings well above 1 can be bullish for the market:

In the past 3 years, you can see that the P/C ratio has been well above this level as the bear market was progressing, tops above 1.5 were common and even above 1.6 occurred back in Feb ’07. This is an indirect measurement of market psychology that needs to be watched carefully now that we’ve broken out to a new range:

Support for the SPX is at 1018, the even number of 1,000, and then 990. The overhead pivot is at 1041. Next week will be a busy one, with the release Monday of the ISM Index, the FOMC decision on Wednesday, and the October jobs report on Friday.

Yesterday’s action definitely put a whiter shade of pale on the bulls, any further decline and it’ll get whiter still.

Procol Harum – A Whiter Shade of Pale:

*I do these reports because I like to educate others and hate to see the public get burned. I do them for free, all I ask is that you occasionally visit and click on a sponsor to help me cover my costs… As Elvis would say in a deeply lowered voice, "why thank you, thank you very much."

Not only are they hiding losses, as this Fortune article states, “nonperforming and restructured assets grew six times as fast as loan reserves over the past year,” but they didn’t even talk about overal debt levels (the elephant), derivatives and how levered the banks are to these markets (Godzilla). Still, a good article that actually made the mainstream…

The disconnect is particularly acute in commercial real estate, where lenders are facing a surge of defaults on commercial mortgages and construction loans made when prices were much higher and demand for space much stronger.

Banks have been recognizing commercial real estate losses slowly, even though the high season for defaults isn't expected to arrive until next year.

That's not the only problem. Ill-defined or inconsistently applied rules for valuing securities and handling loan modifications can make it hard to say how healthy banks really are, from Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) on down.

The risk is that this year's recovery could turn out to be a false dawn, delivering another blow to investor trust -- not to mention people's 401(k)s.

"The credibility of the banking system could take another step back," said Paul Miller, an analyst at FBR Capital Markets. "Everyone is expecting we've seen the peak in losses, but it's impossible to know for sure because you can't get an apples-to-apples comparison."

Extend, pretend?

Banks have been swimming in losses since the collapse of the credit markets in mid-2007 sapped demand for all sorts of goods and services.

Loans written off as uncollectible hit their highest level on record in the second quarter, according to government data. Loan loss reserves are also at a peak since the government started keeping track in 1984, according to data from the Federal Reserve Bank of St. Louis.

Taking losses on souring loans and troubled assets eats into profits, which tends to drive down share prices and executives' pay. The losses also erode capital, reducing lendable funds and forcing banks to raise new money by selling stock or businesses.

Accordingly, banks have been eager to stretch their losses across as long a period as possible. Facing a triple-digit bank-failure count and trying to manage hundreds of troubled lenders, regulators are willing to go along, up to a point.

In April, accounting rule makers gave banks more leeway in valuing hard-to-trade securities. That's led to current discussions over when banks will have to bring some off balance-sheet assets and liabilities back in house.

"Politically, this sort of forbearance is the lowest-cost way of stopping the train wreck," said Wayne Landsman, an accounting professor at the University of North Carolina. "The banks wanted that April change very badly, and you have to assume they wanted it for a reason."

Behind the curve

The risk, of course, is that deferring the reckoning can create a bigger problem later. And there are those who believe the banks are doing just that.

Nonperforming and restructured assets grew six times as fast as loan reserves over the past year, analysts at Keefe Bruyette & Woods estimate, while reserve building as a proportion of new troubled loans tapered off after peaking in the fourth quarter of 2008.

This pattern suggests "the banks are not ahead of the curve in providing for troubled loans," the KBW analysts wrote in a report earlier this month.

Plenty of trouble is ahead. Prices on apartment, industrial, office and warehouse properties dropped 33% over the past year, according to the Moody's/REAL commercial property price index.

Real estate research firm Foresight Analytics estimates banks should have booked losses on around $110 billion of defaulted commercial real estate and construction loans. But so far they have taken their medicine in only about a third of those cases.

That means the banks could face a backlog of $70 billion or so defaulted but unreserved loans as we head into the teeth of down cycle in commercial real estate -- where the bulk of bubble-era loans are due to be repaid or refinanced between 2010 and 2012.

Regional and community banks, rather than the giant TARP-taking entities, will bear the brunt of this onslaught. Banks with between $100 million and $10 billion in assets have almost $900 billion of commercial real estate exposure, Foresight estimates. That's three times their capital.

"Right now, we're closer to the beginning of this problem than the end," said Matthew Anderson, a partner at Foresight in Oakland, Calif.

Apples and oranges

Even some seemingly well established positive trends look muddled with a closer look at the numbers.For instance, publicly disclosed financial reports have been showing a slowdown in the growth of early-stage delinquencies, those in which borrowers are a month or two behind on their bills. Investors have been cheered by this trend because it suggests the worst losses are behind the banks.

But regulatory filings by the same banks often paint a less upbeat picture, said FBR's Miller.

He said nonperforming asset levels were 17% higher in regulatory filings than in public statements, according to FBR estimates based on second-quarter data for the top 25 banks and thrifts by assets -- suggesting that some big banks are understating problem loans as they go through the restructuring process.

One view into this puzzle is the banks' handling of loan modifications and other changes, under the category of troubled debt restructurings.

Troubled debt restructurings have doubled over the past year, according to KBW, as banks extend loan maturities and cut interest rates or loan balances, particularly on troubled residential loans.

But not all institutions account for restructured loans in the same fashion -- which could mean some bank investors are in for a surprise down the road as many restructured loans go sour.

"The issue is that accounting for loan mods is not transparent and makes delinquency data appear better on the surface," FBR's Miller wrote in a note to clients this month.

"It is now apparent that loans made during the strategic growth plan era are not immune to the credit cycle," they wrote. "A consequence of this revelation should be a higher degree of investor skepticism and a lower stock valuation for an indefinite period."

Oh yeah, nine more banks were closed by the FDIC yesterday. Remember the good old days when it was one or two per Bank Failure Friday? I’m thinking those days are well behind us…

As far as commercial real estate goes, the stock market has indeed discounted the industry. IYR, the Dow Jones Real Estate Index (commercial), is still down 51% from its February, 2007, high.

On the approximately 4 year weekly chart of IYR (above), you can see that it performed a near perfect 38.2% retrace of its plunge, a plunge that was so deep that the bounce off the March ’09 bottom resulted in it currently sitting with a 102% gain from the low! Did you buy it there and hold? Didn’t think so… I hope those who did have studied Elliott Wave and know what wave C down means. Hey, commercial real estate, banks, and derivatives… Go, Go, Go - Godzilla!

Oct. 30 (Bloomberg) -- State and local governments led by California sold $11.8 billion of fixed-rate bonds this week, the most in more than four months, pushing 20-year benchmark tax- exempt yields to their highest level since late August.

The most populous U.S. state refinanced voter-approved debt to patch budget deficits with a $3.5 billion deal. Connecticut, Florida, Kentucky, Missouri and New York City also raised money for infrastructure projects through the Build America Bonds program, which provides 35 percent interest rebates from the federal government for selling taxable debt in lieu of borrowing tax-free.

Municipal issuers sold $7.8 billion in tax-exempt issues and $4 billion in taxable debt, based on revised data compiled by Bloomberg. The Bond Buyer newspaper’s weekly yield index of general obligation bonds due in 20 years rose 8 basis points, or 0.08 percentage point, to 4.39 percent, the highest since 4.53 percent at the end of August.

Issuance in October exceeded $40 billion even as investors’ appetite for yields below 4 percent waned, forcing borrowers to pay more on new issues. The Merrill Lynch Municipal Master Index, which measures the total-return of state and local debt, fell almost 2.5 percent through yesterday, the biggest monthly decline since a 5.1 percent drop in September 2008.

This week’s sales sent the amount of Build America Bonds sold since the Obama administration’s economic stimulus created the program this year to $47.4 billion, Bloomberg figures show.

Municipal bonds advanced today, sending yields on 10-year general obligation debt lower by 1 basis point to 3.17 percent, according to a daily survey by Municipal Market Advisors of Concord, Massachusetts. The index is 21 basis points higher than at the end of September.

Weekly issuance was last this high in the period ended June 12, when governments sold $11.9 billion, according to Bloomberg data. The busiest week this year, the one ended April 24, produced $15.4 billion in sales, the figures show.

Note that yields fell yesterday as money moved out of equities, but that in the past 4 months yields (rates) have been rising, thus sending the price lower.

If we’re beginning the C wave down in Equities, I think it’s likely that bonds will do okay as money flows out of stocks, but I think eventually that tide will turn. It may be 2 years, it may be 6 months, or it may be tomorrow, but at some point interest rates are going to go higher, and again, there is now a serious risk of default as municipalities spend far more than they are taking in. Yes, they do have the power of taxation (blood out of a turnip?) but they do not have the power of the press. That said, I can see the Federal Government stepping in with their printing press to rescue failing municipalities, but now we’re getting into playing favorites and politics, the area were revolts are bred.

Friday, October 30, 2009

If you’re someone who owns and invests in Muni Bonds, you need to read this report! I’ve been saying for quite some time that bond investors have enjoyed the best of times as rates have moved from historic highs back in 1980 until now, but now that interest rates have reached zero it is time to reevaluate your thinking in terms of these bonds, especially with government spending ramping at the same time that tax revenues are crashing. Remember, Munis have a historically low default rate, but then again, municipalities have NEVER been as saturated with debt as they are now. It is the power of taxation that municipalities possess, but as that power now appears limited, just exactly how do those debt payments get made?

That’s a question that Mr. Sheehan, answers in his terrific and insightful report, “Dark Vision – The Coming Collapse of the Muni Bond Market.” He is the former director of asset allocation services at John Hancock Financial Services, and the author of an exceedingly well-researched and insightful book just-released by McGraw Hill, "Panderer To Power, The Untold Story Of How Alan Greenspan enriched Wall Street And Left A Legacy Of Recession." Fred also co-authored "Greenspan's Bubbles."

Now, before you dive into this report, keep in mind the bond market updates I’ve been giving over the past year or so… as equities appear set to begin the next leg down, there could come with it a great opportunity to unload Munis for those who are stuffed with them. So, remember that rising rates are not good for bond prices and that you need to buy bonds when rates are high and about to move lower… you need to sell when rates are low and about to move higher. While I think that rates will stay relatively low for some time to come, the risk is that defaults begin to occur and that drives rates higher.

The loss of confidence I see coming is going to not only hit the dollar, but it could very likely hit municipal debt instruments first. Consider this and Sheehan’s report fair warning (reprinted with permission, ht David):

Equity futures are down this morning following yesterday’s fun with Goldman’s market manipulations – we’re definitely throwing a party the day they fail – and they will, I just wish we could get them thrown in jail where they belong. What, a guy can dream can’t he?

The dollar and bonds are both considerably higher overnight, oil and gold are lower. The move in the dollar is larger than the move in equities, so I would expect that the two need to get into synch at sometime today.

Yesterday’s phony baloney GDP numbers painted a false picture of health, pure fantasy. The Fed updated their charts with the latest data, and here is the chart showing the tremendous gain in GDP as presented in year over year percentage terms… look carefully, closer, closer, THERE, right at the end of that historic plunge, see that green shoot of hope that resulted in an 89% up day on dramatically lower volume? That’s it, buy into the B.S. and you will simply go broke as the banksters play illegal games and laugh themselves silly:

And this morning consumer spending showed the vacuum created when government induced misallocation ends:

HighlightsThe consumer sector softened in September in both income and spending. Personal income in September was unchanged, following a revised 0.1 percent gain in August. The September number matched the market forecast for no change. The wages and salaries component, however, declined 0.2 percent after rising 0.2 percent in August.

With cash-for-clunkers having expired in August, consumer spending in September fell significantly on a plunge in motor vehicle sales. Personal consumption expenditures dropped 0.5 percent after a 1.4 percent surge in August. The September decline was led by durables, which fell a monthly 7.0 percent. Nondurables increased 0.7 percent while services advanced a moderate 0.2 percent.

Inflation was subdued in September. The headline PCE price index eased a little to a 0.1 percent increase, following a 0.3 percent jump in August. Core PCE inflation was steady with a 0.1 percent boost in September which is the pace seen for several months.

The inflation-adjusted spending numbers call into question some of yesterday's excitement about a stronger-than-expected GDP report with relatively strong PCE numbers. The quarter "on average" was healthy, but on the margin, it ended with a whimper. Real PCEs fell 0.5 percent in September, following a 1.4 percent spike in August and a 0.2 percent rise in July.

Year on year, personal income growth for September came in at minus 2.8 percent, down from minus 2.7 percent in August. Year-ago headline PCE inflation was steady at minus 0.5 percent in September. Year-ago core PCE inflation was unchanged at up 1.3 percent.

The bottom line is that the consumer sector weakened in September but in line with expectations. The news itself should have no impact on the markets since expectations were met. But equity futures are down on profit taking and belief that yesterday's run up was a little too much. Softening a possible dip in equities is Chevron's pre-open announcement of earnings beating estimates. Markets now will be focusing on the consumer sentiment index coming up shortly this morning.

Note on that chart the huge swing from one month to the next as the money for cash for clunkers ended…

The employment cost index showed modest gains month over month but is showing the largest year over year drop ever recorded in the history of the index:

HighlightsThird-quarter wages popped higher compared to the second quarter but not at all compared to the year-ago quarter in what are mild results for the employment cost index. The employment cost index, a measure of total compensation, rose 0.4 percent quarter-to-quarter, the same rate of increase as in the second quarter and 1 tenth less than the 0.5 percent gain that was expected. What pressure there is is in the wages & salaries component which rose 0.5 percent vs. two consecutive quarters at 0.2 percent. The benefit component lagged wages, at a gain of 0.3 percent, mild but still a 1 tenth increase from the prior two quarters.

Year-on-year comparisons are the lowest in the 27-year history of the series. Total compensation is up only 1.5 percent, down sharply from 1.8 percent in the second quarter, with wages & salaries up 1.5 percent and benefits, which historically have been a center of concern for policy makers, up 1.6 percent. But private industry, a reading that excludes government employees, shows much less year-on-year pressure with total compensation up 1.2 percent and the benefits component up only 1.1 percent. The cost of labor is not yet a concern for policy makers who instead are focused on the critical need to boost the labor market.

Policy makers trying to create inflation should care about the decline in wages – again, take a good look at that chart, you are a witness to deflation and despite (because of?) the money pumping velocity is crashing and wages have yet to budge.

The Chicago PMI and Consumer Sentiment come out shortly.

I’ve been telling everyone that the market is dangerous at this juncture, yesterday’s move was just one example of crooks run amok. It’s also a terrific example of our country losing touch with the rule of law, allowing companies to issue forward reports without revealing their positions in blatant attempts to manipulate the markets.

Of course the market is ultimately much bigger than any one organization or the government. In our current case, however, both the government and the banksters are complicit in the biggest lie, the biggest heist in the history of mankind. That’s why the entire system is highly likely to fail, the truth always eventually reveals itself and when it does confidence will be lost. That’s what happens when the rule of law is not followed.

Think the market is healthy? Take a gander at the latest release of Corporate Dividends… you know, the part where corporations reward people who provide the equity they have to work with – I know, that sounds so old fashioned, so quaint, but if you remember WAY BACK in history to a time when stock markets were about capital and INVESTING instead of gambling and game playing… wait, let’s just look at the chart of Dividends and let the truth speak loud and clear to you:

Oh, and that collapse right there is despite a financial industry that is allowed to mark their "assets" to fantasy.

Got it? The market rally over the past 7+ months has been based on absolutely nothing. A historic crash in earnings followed by a historic crash in dividend payments. As earnings temporarily level out, people have gotten way, way ahead of themselves in thinking that the DEPRESSION is over – it’s not, not by a long shot. Yet, yesterday the government had the balls to declare the recession over. Whatever, they can call it or define it or spin it into whatever they want, it’s a Depression of historic proportions and will remain so until the debt that got us here is cleared. The more they pump, both psychologically and fiscally, the worse the eventual outcome.

The question now is are we going to zoom higher in the last wave up, or are we going to continue our descent? Again, the EW count says that we have one more up leg to go as we never dropped low enough to eliminate that as a possibility. Yesterday’s pump failed to get the SPX over the 1,061 pivot. A break over that and over 1,070 would lead me to believe that we are on that last leg higher and to expect a run back to the top, or even to overthrow the rising wedges. I think Goldman’s game was to let those wedges break down, which they did, and to then run the markets higher in an attempt to break that pattern. It won’t work because the alternative is a broadening top pattern that is equally bearish.

So, watch today’s action to give us a clue to what is occurring now. The divergences are still there, the Transports, for example, look very, very weak compared to the Industrials, as do the RUT and the NDX. Below is a chart of the Transports to put yesterday’s ramp into perspective. Notice the volume and the flag that has developed. I’m seeing it as a triangle on the NDX and RUT right now, so the direction of break from here in those indices will provide a clue, as will the direction of the dollar which is gaining pretty strongly right now.

The show over the GDP yesterday was just fantasy. Clear the debts, enforce the rule of law, and then you will see a healthy economy and markets. Next time you write a letter to the President, title it thusly…

Thursday, October 29, 2009

Of course the history and reasoning are never that simple and Armstrongs expends quite a bit of time and energy explaining the history that leads up to his answers of how the financial world does and should work.

Bottom line quote:

*To PRINT, click "more" then "save document" to open in YOUR .pdf viewer where you can either save or print. Printing directly from the Sbribd menu may not produce good results.

Now let’s talk about Martin’s case… his last attempt at appeal garnered no response other than they moved for restitution in an attempt to punish him for trying to get at the truth. I believe the truth is that they will never allow any of it to proceed in court because the process of discovery, of calling witnesses (hello, Goldman) and garnering sworn testimony will be avoided at all costs.

Here’s some background music for today’s report, courtesy of your government:

ELO - Mr.Blue Sky:

GDP at 3.5%, eh? Does anyone feel a little bit played by the criminals at Goldman? Uh, huh, if you were following our market thread then you will know that Frank, Myself, and others saw the set up coming following GS’s analyst’s lower expectation calling for 2.7% growth. Turns out it was a set up… they drove the market down only to whipsaw the people who remained short or exited prematurely.

Have you ever noticed that good, honest, and reputable people in the investment world disclose their positions when they issue statements or reports? You know, at the end of the business news report, or at the end of Denninger’s “Market Ticker?” That's where you'll see, "No related positions," or something like that to disclose what their conflicts might be.

Yet, when you get a market moving “update” from Goldman Sachs, do they reveal their positions? Of course not, don’t be silly. They are not only not regulated by anyone with any teeth, they are the government and KNOW that they can get away with anything - and they do. Heck, they sell billions of dollars worth of WORTHLESS derivatives to municipalities around the globe while betting against the very products they are selling! Cops? Don't be silly.

And you might screem, “BUT THAT’S NOT RIGHT!” And you would be right. You would also be right in assuming that there was NO REASON for GS to publish such a bad call - other than manipulating the markets. Turns out that the consensus was actually right in running up their expectations to 3.5%, of course they and the government all reside in Wonderland, where Nate’s B.S. flag is flying at full mast.

More on that in just a few minutes, here’s the overnight /YM and /ES so you can see the reaction prior to the open… a fading opportunity or will it go higher still? On today's chart I put the /YM (DOW) on the 30 minute scale so that you can see that it traced out a descending wedge that finished yesterday. That is a bullish formation and sure enough...

The Dollar, of course, is down on the news with bonds lower as well. Oil and gold are higher, but I ask, did that report end the historic build ups in crude? Is growth and demand really there, or is it all trumped?

I say trumped, but let’s take a gander at the release according to Econoday:

HighlightsToday's moderate increase for third quarter GDP should provide some psychological lift for consumers and businesses since it is the first positive growth for the overall economy in just over a year. And financial markets are likely to like it since it is all about expectations and the advance estimate topped expectations. Real GDP in the third quarter rebounded an annualized 3.5 percent, after declining by only 0.7 percent in the second quarter. The third quarter boost came in above the market consensus for a 3.0 percent increase.

The improvement in real GDP in the third quarter primarily reflected upturns in personal consumption, inventory investment, exports, and residential fixed investment and a smaller decrease in nonresidential fixed investment that were partly offset by rise in imports, a downturn in state and local government spending, and a deceleration in federal government spending.

Indeed, some of the component numbers were encouraging. PCEs rose an annualized 3.4 percent, led by durables with a 22.3 percent jump. Residential investment made a partial rebound of 23.4 percent-the first gain since a 2.6 percent rise in the second quarter of 2006. Inventories did add to third quarter growth but the "increase" was actually less of a decline in the change in inventories. Businesses are still facing lean inventories and any rise in demand could boost production for inventories. Both exports and imports were up after a string of negative quarters for both.

Cash for clunkers did add substantially to third quarter growth as motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.

Year-on-year, real GDP improved to down 2.3 percent from minus 3.8 percent in the second quarter.

Inflation is still subdued as the GDP price index edged up 0.8 percent, following no change in the second quarter. The consensus had projected a 1.4 percent rise in the latest period.

Today's report should be a positive for equities, possibly damping the view that stocks are in a correction.

Note that the 3.5% growth number is the growth for the quarter annualized (GDP X 4), that means that the quarterly growth was .875%, according to those who manipulate, errrr - compile, the statistics. The growth figures are all subject to compilation errors and we include government spending as “growth,” despite the fact that government spending subtracts from the economy, and does not in reality add to it.

We then let the BEA tally up all their data (each category of course has its own tallying, and errors, to be done), and then that figure is adjusted for inflation via the “deflator.” This is one of the largest sources for error as the BEA is allowed to take inflation data and adjust to “real” growth. If inflation is positive, as is normally the case, the deflator is used to subtract out inflation to find their real growth. If inflation, however, is negative, then it is added to find “real” growth, right? Right, sometimes, only not ever as is witnessed in this table from the BEA’s GDP report which follows.

Note that they used .8 as a deflator for this quarter’s adjustment, much less than the historical norm and less than the consensus 1.4% (yet the consensus headline beat), but not a negative number as one would expect with a negative CPI and negative PPI. That’s because the BEA uses their own numbers to produce the deflator that seem to have no basis in reality as do many of their adjustments that can be found in their “price index” and “quantity index” figures. Computations on top of computations built upon assumptions. It’s a mess, really, and you’ll find that when you really dig into this report that they are even placing a value on new construction, etc. How do they value that construction, do they value it like Goldman or JPM value their derivatives, or is it all just nonsense?

And take a gander at this table that shows quarterly changes expressed in percentage terms. Are you telling me that third quarter motor vehicle output increased by 157%!!! Riiiiight. Cash for Clunkers was a Keynesian hit, but it sure as heck did not cause output to more than double. And do you believe with what you know about tax receipts and retail sales that goods have moved from -8.7% six months ago to +9% in the past quarter, an 18% swing? Riiiiight.

Meanwhile tax revenue, shipping, trade, credit, sales, home prices, CPI, and PPI are all heading lower as oil and natural gas inventories build. Something isn’t adding up… in Wonderland where the only true growth is in government debt and bond offerings.

Here’s a chart from CNN showing the recent “Growth” turnaround. Even they ask the question as a lead into this chart, “Are things really getting better?”

Sure they’re getting better… for Goldman, JPM, and WFC.

Raise your hand if you really believe that we went from -6.4% to +3.5%, a 9.9% swing in the past two quarters? I didn’t have much confidence in our paper economy before, I have even less confidence in it now.

There are huge adjustments in this report, especially for imports and for autos. They are amplified as the quarterly figures are multiplied to produce an annual figure. It’s very likely, in my opinion, that as those one quarter positive adjustments reverse that GDP will resume its downward trend – subject to all sorts of manipulations, of course. Of course I believe that the GDP report is so messed up that it overstates reality by AT LEAST 20%. Remove government spending and it’s overstated by as much as 40%. Again, I would dismantle the BEA and all government agencies that produce statistics and I would completely start over – a big subject and a big dream, I know.

Now, on to the weekly employment report. Once again a higher than expected number of 530,000, massive numbers of people are falling off the roles as their benefits, and extended benefits, run out. Here’s Econoday:

HighlightsJobless claims are not offering a clear indication of what to expect for the October employment report. Initial claims held steady for a fourth straight week, edging 1,000 lower to 530,000 in an Oct. 24 week that was not skewed by special factors. The four-week average is at 526,250 and does show improvement, down about 20,000 vs. this time last month. Continuing claims, where the latest data is for the Oct. 17 week, fell substantially, down 148,000 to 5.797 million and, for the first time since April, bringing the four-week average below 6 million at 5.961 million. But the improvement reflects an uncertain mix of hiring together with the expiration of benefits. Those receiving emergency compensation fell more than 21,700 to 3.369 million with those receiving extended benefits down more than 49,300 to 526,700. Today's GDP report shows significant strength but continued strength will depend on improvement in the labor market. The next key reading on the labor market will be the ISM's manufacturing employment index on Monday followed on Wednesday by ADP's payroll count.

And back in earnings land we find a much anticipated report from Exxon. Let’s see how that went:

The world's largest publicly traded oil company said it earned $4.73 billion in the second quarter, down 68% from $14.83 billion a year earlier. On a per-share basis, Exxon said it earned 98 cents, down from $2.85 in the third quarter of 2008.

The results were below forecasts. Analysts surveyed by Thomson Reuters were expecting earnings of $1.03 per share.

Revenue plunged to $82.26 billion in the quarter from $137.74 billion a year earlier. Sales were lower than the $85.16 billion analysts had forecast.

The results were "impacted by lower commodity prices and weak product margins," Exxon's chairman Rex Tillerson said in a statement.

Oh my, how can this be? Isn’t this the same quarter that the GDP GREW by 3.5%???

You know what Mark Twain said about liars? “There are lies, damn lies - and statistics.”

We have yet to eliminate the possibility of that final EW wave higher, so it will be interesting to see the technical results after today’s action. Will this simply be a corrective wave on the way down, or is it another wave, the final EW push higher? Stay tuned, watch the pivot points (1,061 overhead, 1,041 support) and the reaction as prices attempt to reenter their rising wedges.

The purveyors of Wonderland are pulling out the stops to paint a picture of blue skies, all the while certain privileged corporations work to manipulate the markets and take advantage of those singing along. I’m singing along, only in my twisted mind the words have changed a little… “nothing but bull _ _ it, do I see…”

Wednesday, October 28, 2009

It’s time that we reviewed the longer term charts to take a look at the rising wedges within the ongoing bear market. All the indices produced those rising wedges, they are a bearish pattern that normally will retrace the ENTIRE move back to the base of the wedge, or more. That means that the odds favor us revisiting the lows, or more. Additionally, sell offs tend to happen in half the time of the advance...

Below is a current 2 year weekly chart of this bear market to date in percentage terms. While this bear market wave B has been historic, you can see that even a 65% rally leaves us one third of the market below its peak, and that’s WITH substitution bias (companies that fail are replaced).

All of the indices except the DOW have now broken their rising wedges, although the SPX just barely as of the time of this writing. The SPX is sitting right on its 50 day moving average after breaking its rising wedge. The break on the SPX is not convincing yet, it needs to get below (and close below) that 50dma for me to be convinced that the rising trend has shifted back to a declining trend (a new low will be made below 1,020).

Next is a 2 year daily chart of the SPX. You can clearly see the rising wedge and that we have just now broken the lower boundary – as I said, not convincingly yet. The red downtrend line is the bear market trendline that stopped the advance. This same trend line was broken several times during the Great depression, so far in this Depression, it has not been. The odd looking green rising trendline is the 20 year rising trendline of the market – approximately. It was resistance on the way down and for now seems to be attracting prices to it. The 200dma is now rising and is currently at 920ish. The volume (not pictured) is divergent, but now rising on the decline. The daily stochastics fast is now oversold, but the slow has a way to go still. The RSI is clearly divergent from prices, something that was also seen at the ’07 top:

A quick note about these charts… I am using them with the logarithmic scale turned off. If I turn them on, then the wedges come to a sharper point and the SPX is even further away from the uptrend line.

The DOW is the lone hold out for now, but you can see the same picture in play. Note that I’ve included the entire bear market Fibonacci levels, along with possible retracements if the top of this rally has been put in:

The Transports are diverging bearishly from the Industrials. They have convincingly broken the wedge after putting in a nasty looking double top. This chart is very weak, very bearish looking. The Transports bounce was completely disconnected from the fundamentals seen in shipping statistics:

The NDX ran up into its 61.8% retrace and failed there. It has now also convincingly broken its rising wedge:

The Utilities are the weakest of all the indices, having not even managed a 31.8% retrace. It also didn’t even manage to build a rising wedge and looks more like a rounded top:

The XLF is also very weak, having failed to retrace even 31.8% of the rally. It has been hailed in the mainstream for leading the recovery, but has in fact been trailing. It is only leading in percentage rise terms which are very, very misleading with a bottom that is in single figures. Of course the financial sector is dead, it has merely been zombified and swept under the rug so that we can’t see what’s happening. What’s happening in reality is that the large banks in particular are rife with leverage and toxic derivatives which, if marked to any semblance of reality, would wipe them out many times over. Frankly, there IS NO HOPE that the situation in the financials will improve until and unless we alter course drastically and immediately from the path we are on:

The VIX is rising into the mid 20s. Watch the 29 to 30 level where we double topped before. Triple tops are so rare that it's almost safe to say they do not occur. Therefore, if we reach that level I'd expect it to break (3 month daily chart):

Speaking of double tops, here's a 3 month close up view of the Transports... a clear double top with a new low, a very bearish formation:

The RUT is also very bearish. It, too, has a perfect double top and is making a new lower low. The rule with double tops is; the wider the double top, the more pronounced the subsequent decline:

The Dollar ran into the lower boundary of its descending wedge (one year chart here) and is bouncing hard back up into the upper boundary. In fact, it’s poking into it or even through it now. A clean break above this wedge will also signal a change of direction:

Now, all these charts are pointing to the bear market rally top being in, but the Elliott Wave count still allows for one more push higher. If that is going to happen, it needs to happen immediately but definitely before SPX 1,020 (a new low) or it can be assumed that the count is over for wave B and that wave C has begun. So, do not be surprised if we attempt another leg higher from here – if we do, it can go on to new highs, or it can truncate short of the top of the rising wedges. These retests are a part of the psychology, they allow for distribution to the ill-informed, something that I’m seeing now.